Penske Automotive Group Inc (PAG) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group fourth quarter 2008 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through February 24, 2009. Please refer to the Penske Automotive press release dated January 28, 2009 for specific information about how to access the replay.

I would now like to introduce today Tony Pordon, Senior Vice President of Penske Automotive Group. Sir, please go ahead at this time.

Thank you, Tony and good afternoon, everyone. A press release detailing Penske Automotive Group's fourth quarter results was released this morning and is posted on our website at www.penskeautomotive.com. Participating with us on the call today are Roger Penske, our Chairman, Bob O'Shaughnessy, our Chief Financial Officer and JD Carlson, our Controller. And as always, at the conclusion of our remarks we'll open the call up for questions, and I'll be available afterwards to accept any questions that you may have by dialing my office. Before we begin, I'd like to remind you that we may make forward-looking statements relating to Penske Automotive on this call, and we caution you that these statements are only predictions and are subject to risks and uncertainties relating to general economic conditions, interest rate fluctuations, changes in consumer credit and spending and other factors over which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together with the information about Penske Automotive in our public filings including our annual report on Form 10-K. During this call, we will be also discussing certain non-GAAP financial measures including adjusted income from continuing operations and adjusted earnings per share from continuing operations. As outlined in our press release, our results for the fourth quarter and full year in 2008 and 2007 included items we have identified as being unusual in nature. The adjusted earnings discussed on this call exclude those items. I would like to point out that the press release we issued this morning contains a reconciliation of actual earnings to adjusted earnings for all relevant periods. We believe addressing adjusted earnings improves the comparability of our financial results from period to period and will be useful to you when evaluating our financial performance. And at this time I would like to turn the call over to Roger who will have some comments.

Thank you, Tony and good afternoon, everyone, and thanks for joining us today. Today we reported a loss from continuing operations of $5.55 per share for the fourth quarter. This loss includes after tax charges of $502 million or $5.52 per share, including $493 million relating to intangible asset impairments. Despite the charges, it's important to note that Penske Automotive Group is in compliance with all of the financial covenants included in its credit agreements. I'd like to point out that we have included a summary of our debt covenant compliance in our press release this morning. As you all know, the fourth quarter was extremely difficult and our revenues declined 29%. We experienced a significant decline in traffic, vehicle sales due the overall weakening of the economy, consumer confidence and credit markets in the US and overseas. In fact, during the fourth quarter, US new vehicle industry unit sales declined 35% and market registrations in the UK declined 27%. Our business experienced similar declines. As I look back over the quarter, October business was weak, but November was substantially weaker. December improved somewhat compared to November in part due to increased incentive programs offered by manufacturers. As business conditions deteriorated during the fourth quarter, we accelerated the cost reduction efforts we highlighted to you during our last call. Let me provide you at this time some additional detail on the charge during the quarter.

Adverse market conditions, deteriorating credit markets and the decline in our stock price during the fourth quarter caused us to writedown our goodwill and franchise value pursuant to FASB number 142. As I noted a moment ago, the after tax non-cash charge for this was $493 million or $5.42 per share. We also continued our efforts to improve our operational efficiency and cost effectiveness. As part of these efforts, we consolidated or relocated franchises in certain markets to better align our business with market conditions. In particular, we consolidated our Jaguar and Land Rover dealerships in Phoenix with our Jaguar and Land Rover business in North Scottsdale. We expect the consolidation of these businesses will generate savings of approximately $2 million per year. We also relocated a Honda business in California to a new facility. We recorded after tax charges of $5.8 million or $0.06 per share for redundant lease costs and fixed asset impairments relating to those efforts. We also continued to reduce our workforce during the fourth quarter. As a result, we recorded an additional $2.5 million or $0.03 per share of after tax severance costs during the fourth quarter. Combined with our efforts in the third quarter, we have reduced our workforce by approximately 10% during the second half of 2008 and we estimate this will result in savings of approximately $50 million on an annual basis. Adjusting for unusual items in the fourth quarter, our net loss from continuing operations was $2 million or $0.02 per share compared to $32 million or $0.34 per share last year. For the year, adjusted income from continuing operations was $101.6 million or $1.09 per share compared to an adjusted income of $143.7 million or $1.52 per share in 2007.

Let me talk about our other cost actions. In addition to the actions outlined above, further cost savings initiatives in Q4 included suspension of the company's 401(k) match in the US, reductions in company marketing and spend and directer and management compensation. Today, we believe we've achieved $100 million in annualized cost savings through these actions. As we announced on February 2, we also suspended our quarterly dividend in light of industry conditions. This will save $8.2 million of cash per quarter compared to our most recent dividend of $0.09 per share in the last quarter. Let me now take some time to take you through the performance of our business in the fourth quarter. Retail unit sales decreased 22.5% to 53,000 units. New declined 30.4 and used declined 7.2. Total revenue was $2.2 billion compared to $3 billion last year in the same quarter. Excluding the effects of changes in foreign exchange rates, revenue declined 21%. If I take it by category, new vehicle reported was 37.1% negative, excluding FX, it was negative 32.7%. Used vehicle was down 27.5% reported, excluding foreign exchange, down 18.3%. Our F&I was down 36.8% reported, excluding FX, was down 30.5%. Service and parts was down 6.1% reported, excluding FX , it was up 1.3%. On a same store basis, retail revenues decreased 33.5%. Excluding the FX of changes in foreign exchange rates, same store retail revenue declined 27.4%, down 29, 7% in the US. In the international we reported 40.3%, but excluding foreign exchange, we were down 23.2%. Breaking down the same store results, new vehicle reported down 39.7%, excluding FX, down 35.4%. Used vehicle down 30.5%, excluding FX, down 21% and service and parts down 9.3% reported. On the same store basis, we were down only 1.5%. Same store new vehicle units were down 30.4% which was consistent with industry declines experienced in the US and the UK markets. Used vehicle same store declined only 10.6%.

One point I wanted to make today was our new -- used to new unit ratio increased to 0.7 to 1 and internationally, we retailed 7,300 used units for the quarter and our used to new ratio was 1.1 to 1, so that was up dramatically. I am pleased to note that our service and parts business performed well, despite the difficult industry conditions. Same store service and parts revenues in the US was impacted by lower revenue from our collision centers, and a reduction in predelivery inspection and other internal work due to the decline in new unit sales, which only declined 2.9%. In foreign exchange, same store service and parts revenues were up 1.2% in our international markets. Revenue mix for the quarter, the United States was 69% versus 64% a year ago and internationally, we are at 31% versus 36%. Looking at the total year, domestic big three volume was 5%, foreign volume, 29% and premium, 66%. Turning to financing, the customer obviously is under some impact of the credit markets and we can still see that good qualified customers still can get financing. However, we've seen lenders lower advance rates and enforce tougher underwriting standards. Despite these challenges, our captive lender penetration, those are the OEM lenders, increased from 74% to 76% during the quarter. Looking at our tax rates, excluding the impact of intangible impairment charges, our full year effective tax rate was approximately 36% in 2008. We currently expect our annualized effective tax rate in 2009 to be approximately 37%.

Let me move quickly to the balance sheet. Total vehicle inventory was $1.5 billion, down approximately $100 million compared to September of this year. And on a same store basis, vehicle inventory was down $105 million compared to December. The end of the fourth quarter, our days supply of inventory in the United States was 99 days and our used was 39. We continue to focus on reducing our new vehicle inventory, essentially turning down inventory allocation across our portfolio of brands. I'm pleased to report that our vehicle inventory today is down another $130 million since year end. Since the end of September, our vehicle inventory is down approximately $230 million or 14%. Moving on to CapEx for the year, our gross CapEx was $211 million, proceeds from sale leasebacks and mortgage were $80 million. As a result, net CapEx for the year was $131 million. We expect net CapEx for 2009 to be between $35 million and $40 million, which represents a reduction of over 70% comparison to 2008. Let me just now mention our liquidity. Our long-term financing arrangements are $459 million credit facility in the US with Daimler Financial and Toyota Financial matures no earlier than 2011. We had $209 million outstanding on this line at the end of the year. Our $157 million credit facility in the UK with The Royal Bank of Scotland matures in August of 2011, and we had $96 million outstanding on this as of December 31. The only amortization required under either facility until 2011 are quarterly term loan payments of $2 million in the UK. We have $375 million of 7.75 subordinated notes that mature in 2016. We have $375 million of 3.5% convertible notes that mature in 2026, but have an investor put in April of 2011. We have $42 million in mortgages in the US. In total, we had $1.1 billion of non-vehicle debt at December 31 and approximately $311 million of availability under our credit lines.

Turning to floorplan, we also have a $1.5 billion in floorplan notes outstanding. Substantially, all of our floorplan is with captive finance companies, not banks, and I think our relationships remain very strong. With a $1.5 billion in total floorplan, approximately $1.2 billion is with Toyota, Honda, BMW, Daimler or Audi. We have swaps in place convert $300 million of variable rate floorplan to a fixed rate of 4.65% through January of 2011. In total, 43% of all of our debt, including floorplan was fixed with an average interest rate of 5.1% and an average maturity of 4.2 years. Looking at acquisitions, during the fourth quarter, we completed one acquisition in the UK which included an Audi and three BW franchises. This represents an opportunistic purchase available largely as a result of the current economic condition. The total cash consideration for this transaction including working capital was $5.7 million and a multiple on this was approximately one time. In total during 2008, we acquired businesses which we estimate would generate $550 million in annualized revenues and we divested of dealerships that generated approximately $400 million in annualized revenues.

Let me turn to Smart. During the quarter, we wholesaled approximately 7,700 units, bringing the total wholesale deliveries for the year to 27,000 units. Smart contributed $0.05 in EPS in the quarter and $0.19 for the year. We are extremely pleased with the performance of the smart business during 2008. In the first year here in the US, it's already the third largest market in the world for the Smart fourtwo, behind only Italy and Germany and represents only 18% of the total worldwide sales. There are 75 Smart retail centers in the US today. We had more than 9 million visitors to the Smart USA website. After only 18 months of exposure to the US market, the Smart fourtwo brand awareness has been measured is 80% and media coverage resulted in more than 305 million impressions during 2008. Just looking at 2009, the new Bravis model with an initial allocation of 1,800 vehicles sold out in about eight hours. We've also implemented an enhancement to our $99 reservation program called Smart Express. Smart Express matches available vehicles with other insiders on the reservation list, ensuring that reservation holders receive their vehicle as quickly as possible. We're also pleased to see that the 2009 automotive lease guide assigned the highest residual value of any small car to the fourtwo. Let me turn to our investment in Penske truck leasing. Our equity in PTL amounted -- earnings amounted to $11 million since our investment. We expect that we will receive an aggregate of between $10 million and $50 million of distributions during the first 12 months of ownership. PTL will also serve to help us realize lower current tax and cash payments in the US. We have projected that the total cash we pay in the US will be approximately $20 million less related to our 2008 due to our investment in PTL. This includes our ability to carry back current tax losses for refunds of certain prior year cash tax repayments.

During the quarter, we purchased 450,000 shares of our stock for $3.6 million. In total during 2008, we repurchased 4 million shares for $53.7 million. As a result, we have an additional $96.3 million of authorized availability under our repurchase program. Let me move on to guidance. As noticed in our press release this morning, we will not be providing earnings guidance at this time due to uncertain market conditions and the lack of visibility in our earnings. Before we open up the call for questions, I'd like to make a final few comments. While this downturn has been difficult, I believe the actions we have taken have made our business stronger for the long term. We've got a great brand mix, and these brands continue to gain market share. Our Smart distribution business continues to perform well, and I think it brings added diversity to our model. Our investment in PTL continues to be accretive from a cash and earnings perspective and we have expanded our collaborative efforts to try to achieve mutually beneficial efficiency opportunities. I appreciate the attention to the call today, and let's open it up for

Thank you. (Operator Instructions). Our first question will come from the line of Joe Amaturo with Buckingham Research. And your line is open.

Good afternoon.

Hey, Joe.

How are you? Just a clarification. Did you say that the PTL investment's going to yield about a $10 million to $15 million distribution in the first 12 months?

That's correct.

In addition, just so I understand this correctly, you said that there's going to be a $20 million cash tax benefit in '09 versus '08?

We get the benefit of the accelerated depreciation because of our ownership on the assets there. There will be less in '09, but that was what we picked up in '08, yes.

Okay, so you're probably looking at $10 million to $20 million year on year improvement in cash, all else constant?

I think what I would have you do, rather than me answer that, have Bob O'Shaughnessy, you might give him a call, let him answer that correctly. Give you a more precise answer.

Okay. And then at the end of 2008, did you have any debt outstanding against the used vehicle inventory?

We have typically, probably 20% to 25% of our used vehicle inventory financed on a worldwide basis. Typically, these are the more expensive buybacks that we have either coming through the premium manufacturers or some opportunistic buys we would make in the UK.

Okay. And then the last one, I noticed that rent expense went up about $10 million in 2008 versus 2007. Just could you give us a sense of -- I know you're not giving guidance, but where that's expected to be tracking in '09?

I think the majority of the rent expense would have gone up through the addition of CapEx that we've done, and I would assume that it's going to level off, maybe be up 3% to 4% for the year might be realistic, but it's not going to be any more than that.

Okay. Thank you. Take care.

Yes, thanks, Joe.

The next question in queue will come from the line of Matt Nemer with Thomas Weisel Partners. Your line is open.

Good afternoon, everyone.

Yes, Matt.

So my first question is on the cost cuts that you've talked about, of the $100 million, what percent of that or what dollar amount would you consider to be fixed versus variable? And then how much more room do you think there is to go if we're in this for a little while longer?

I would say the costs we've taken out now are structural. Obviously, when we look at the headcount reductions, almost 10%, you'd say that about 60% of the reduction has come from headcount. Marketing and advertising down approximately $30 million, and that's a lever that we can -- business would increase and we would add -- we would certainly add to that if necessary. We've got certainly more room there, and corporate expenses were down over $10 million. We eliminated the 401(k) match which is probably $6 million, and we've got some consolidations that we've done in the marketplace, not only in the US, but also internationally, which will generate more fixed costs out. So inventory reductions will take some costs out as we go forward. So to me, if we're in the same type of an environment, we still have more room, and I guess we're assessing those today in every single market and what we can do to consolidate jobs, take out offices where we're able to consolidate back offices have been quite successful for us to take out structural costs on a continuing basis.

And that segues into my next question which is given what you did in the Phoenix market in terms of combining some stores and rationalizing some real estate, is there an opportunity to do that with other stores in other markets?

Well, that one was obvious to us. Based on the market share and the sales rate of Jag and Land Rover, and I think that where we have markets with contiguous brands, we certainly would look at that. But in most cases, we don't have two points in the same market. Now, internationally, we have markets where we have four or five points, and those are typically geographically spaced so they're not really competitive, but just gives us a bigger footprint. But I know the guys, Gerard and his team are looking at that in the UK to see if there's any opportunity there also.

And then just a quick question on PTL. Is there, from an income statement earnings standpoint, it looks like it went from about $9 million to just over $3 million. Can you give us a little more color on what the change was? I'm assuming that some of that is seasonality, but is that core business showing some erosion as well?

Well, let me say this, that the third quarter is always the best, because we have -- it's the strongest part of our one way business. You have all the kids going back to school. We go typically from June through September with the strongest part of our consumer business, and then as you get into the fourth quarter and it's cyclical, your logistics business kind of tails off in December because many of the companies shut down for the holidays and obviously this year, there was little bit more of that due to the current economic conditions. But I don't think that there's anything there that would be a situation that we wouldn't be dealing with a depleting, as we see less rental business, we have the opportunity to deplete. In fact, what we're doing where people don't want to sign up for longer term leases, we can take units out of the rental fleet and lease them for a period of say, two to three years, rather than a typical five or six years. So there's lots of levers there, and I think that we've been able to take the fleet down quite a bit on the rental side, because that's the variable piece. The majority of our revenue is fixed by contracts, anywhere from three to five years. And then we have the ability during these times to go out to companies who want to really take out man power, we can take over the maintenance on their vehicles and utilize our purchasing power and also our systems in order to reduce their costs.

But on the long term side of that business, on the long term contracts, anything that we should be thinking about in terms of churn rates or particularly for customers that maybe are -- have bankruptcy protection, have been able to get out of some leases, is there any concerns along those lines?

We don't -- we have -- we look at our delinquencies and quite honestly, we've had -- the only area that we would see some uptick would be on the pure rental side, and that business is down and it's only about 15% of our overall revenue. On a consumer side, we get paid by credit card, or check or cash at the time of execution of the rental. So I don't see any risks there. Contract maintenance was up about 11% last year, year-over-year, so we are taking advantage of our capability there where people want to take out some of their captive shops and take the people out, we get the benefit just to walk in and utilize our shops for that work.

Okay. I will get back in line. Thanks, Roger.

Thank you.

Thank you. The next question in queue that will come from the line of Rich Kwas with Wachovia, and your line is open.

Hi, good afternoon, Roger.

Rich, how are you?

All right. On used vehicles, ASP down dramatically year-over-year and down pretty significantly sequentially. What's kind of going on on the mix side?

Well, I think that if you look at transaction price, I think we were down about $1,500 per unit in the US. We have this retail first mentality to try to reduce wholesale loss and also to generate more used business, and that generated about a $400 less per unit on a gross profit basis. In these times, you're going to have some pressure on margins, and we certainly saw that in the U.S. In the UK, basically, we had the FX which had a bigger effect both on the sale price and also on the gross profit, but these downturns, and I'm looking at the margin more than the revenue side, and we're trying to manage those the best we can. Quite honestly, we have to be careful as we've seen these markets deteriorate on the used side, obviously, some of our inventory carrying has been a little bit higher and what we're trying to operate in a 60 day window on used, you have to move these vehicles so in some cases, we've had to take losses or retail at a lower selling price in order to move the vehicle, and that's just a dynamic in the market.

And are you seeing any benefit from the improvement in wholesale values of late where you're able to generate a little more profit? Is that started to come through at all or is it still too early?

I would say that if someone asked me is there a bright light out there, I would say it has to be in the used car business. Point number one, we were seeing the wholesale values, the auction values just drop, drop, drop. We've seen those stabilize and on many of the cars that we're dealing with in our brands, Toyota, Honda and just to mention a few, we've seen those values actually go up. As we go to the auctions now, to try to buy vehicles from the OEM auctions, we're seeing higher prices, and I think that's a positive. Now, that's really taking the place in some cases of new vehicle sales because there's such a difference as you buy these one year and slightly used new vehicles, there's a big discount between a new purchase and the purchase of a used one. So it's more attractive to the consumer. In The UK we've made some very, I would say beneficial purchases from certainly the manufacturers, and I'm talking hundreds of vehicles which have turned out to be quite beneficial to us as we move here into the first quarter. So I think residuals are up. There's no question. That's going to help the finance companies if they have to take less losses on some of their repos because the market is better, that might get them to extend their arms a little farther with the customer.

Okay, and then finally, on the UK business, there's been some discussion around the UK adopting some kind of scrappage plan similar to some of the other European countries. What's your sense for how likely that is to occur, and then how much -- if were to occur, how much benefit would that accrue to you, given your luxury focus?

Well, at the moment, we have this benefit here in the US, up to $50,000. There's the tax -- sales tax is going to be able to be written off, I believe. But in Germany today, they have what they call clash for clunkers, I guess you call it. These are cars that are nine years old, and we get the benefit of that. I have not had any information that would be that that's going to happen today in the UK from the standpoint of the premium luxury. There's no question that it's helped in the -- in Germany with our Toyota joint ventures there and Audi. We're seeing a benefit. So it really goes OEM to OEM based on what the amount is and what the year cars would be utilizing this type of an event.

So it doesn't sound like there's something near term necessarily.

I'll get back to you. I'll have Tony get back to you. We'll talk to Gerard because he's here for our board meeting and get that information. But I'm glad to see that the stimulus package, here in the US at least, gives us some interest deductions on vehicles up to $49,000. Because that covers a broad range of the cars that we're going to sell.

Okay. Thanks, Roger.

Thank you. The next question in queue that will come from the line of Matthew Fassler with Goldman Sachs, and your line is open.

Thanks a lot, and good afternoon to you. I want to start off on the SG&A front or the expense front. If you could just clarify for us, the $100 million of expense cuts that you discussed today, does that compare to 50, which was I think the number that you used on the third quarter call? And of that run rate, how much -- I know that you achieved that run rate. I'm not sure if that is as of today or if that is as of the end of Q4. So in other words, I'm trying to figure out how much of that you achieved in the fourth quarter and how much we should model in as showing up for the first time next year.

I want to be sure that the $100 million we talked about in the press release to me is real, as we would move through Q1 and through the balance of '09. I think there's maybe some disconnect on whether it was $24 million. I think we had $24 million that we had taken primarily that was in the people's side, and we anticipated taking another $25 million out throughout the fourth quarter. So I would say these people are out. These are comp plan changes if they're not people deleted from the workforce. As I looked at the number, we're down, as I said, almost 10% in total worldwide headcount.

Got you. Okay. Second question. On capital allocation, you did buy back a little bit of stock in the fourth quarter. I'm not sure if that was early or later on in the game.

That was very -- that was right early, really, I think it was one block trade and that was -- that happened in October. Obviously, as we cut out our dividend and other things, we were not in the market to buy back stock.

Got you. I guess now that the stock is down around $6 give or take, is capital allocation for you going to be driven by stock price or perhaps the price of the convert or is it going be driven more by essentially the sense of posture given how tough the environment is?

The first thing I want to do is look at liquidity, and I think we demonstrated on the call that our bank lines, the financial capability of the company is -- internationally and domestically is -- we're in fine shape. We've got a board meeting coming up. We continue to talk about what our cash -- where we'll spend our money and is it going to be in stock? Is it in buyback of either the subset convert or the 7.75? I think we ought to stay tuned on that. Obviously, I want to be sure, as I said, and I was criticized for this I think back sometime in the third quarter, that we didn't start buying back either debt or stock, and I think it was the right thing, because I had no idea that we were going to be entering into the type of environment we have today. So I would say that I have a caution light out on that. If there is a benefit on the debt side, we would certainly look at that. We're also looking as we made one very small acquisition in the UK at a one time that was strategic for us, so we want to keep our powder dry here, but I'll have a little better feel as we get through this first quarter.

Understood. I also want to take a quick look at gross margin rate. Somebody raised essentially the per vehicle retail of sales and gross margin and gross profit numbers. As you think about the selling environment today, and you and everyone else exited the fourth quarter a little bit heavy, as you think about what it will take to move vehicles here, do you see the fourth quarter margin rate as kind of being a new reality, or is that -- or is it a bit extreme? It was a bit, obviously down quite sharply year-on-year in both new and used.

You travel with me, the first thing I talk about is gross, and gross margin. I would hope that -- the margin I think is just -- as we look at the market and people who are on variable compensation are trying to deal with the public and get sales, typically they're on variable compensation, so we've got to do a better job managing the expectations of the salespeople and the customer. Our inventory, and I think you'll see this throughout our peers, is coming down substantially, and I don't think that by lowering the price that I'm going to move the merchandise any quicker. In fact, I'm hoping to get higher margins on used cars. I think our inventory's in great shape when you look at where we are. In fact, we need used cars right now, both domestically and internationally and I would expect that these margins would move up hopefully during this first quarter. But again, we're seeing times that we've never seen before, so I don't want to give you a bad answer.

And then one final question. On the Smart side, obviously with fuel prices having come down, perhaps a little less urgency for fuel efficiency and compact vehicles. Are you still seeing a backlog there, and do you think that you can match '08 sales numbers in 2009?

I think Smart's in the same neighborhood everybody else is. I don't think that if this market is down 20% or 25% during 2009, we're going to see the same impact. The only thing we have as an accelerator right now is we're sitting with about 31,000 reservations. Now the point is, can we match these reservations with customers who are in line, and we have Smart Express now, so we're obviously looking at new ways for lead generations. We've been very active at probably about 15 local auto shows around the country, and I think that the programs that we have are in place. Ironically, when you think about it, we went into the market with with with a Bravis model, only had an allocation of 1,800 sold it in less than a day. So there's co-op programs that we have with our dealers and to me, we're going to have a year that's going to be in the same environment that everybody else is. I mean, we've seen it with Mini. We happen to have -- Mini is one of our competitors, and there's no question that they've seen the pressures also. We've seen the day's -- our days supply was at 30 days at the end of the year, so that was in pretty good shape.

Great, thank you so much.

Thank you. Our next in queue that will come from the line of Rick Nelson with Stephens Incorporated, and your line is open.

Good afternoon,.

Hi, Rick.

You talked about choppy results month to month in the fourth quarter. Can you tell us what you're seeing in the early going of 2009? I know you mentioned now used cars are picking up. Any other color would be helpful.

Well, I think we would have to say that both domestically and internationally, that the used car business is certainly better. I haven't seen a big uptick, quite honestly, on the new car side, both US and internationally. And I think if we sustain our parts and service business and our margins stay there, that that would pretty much be the environment I see for the quarter. Now, remember, we've got this overhang today with the current situation in Detroit. I think that has a -- with all this noise, that people are just waiting to see what's going to happen. Not only in the domestic side, but also from the standpoint even in the foreign name plate. Once that answers are there, I think that's going to hopefully give us some momentum. To me, as we look, different parts of the US, we've seen the Northeast be tougher than we had expected it to be, but we certainly an impact of what's going on in the New York area. Our Phoenix business has not really rebounded. We've done the consolidations there. We've got office consolidations. So what we're going to hope to do is get the benefits of these cost reductions and manage this way -- our way through the next couple of quarters.

The cost caps at $100 million program, was that back end loaded during the fourth quarter, where the big benefits are coming here as we look into 2009?

There's no question. I mean, the people are out, the comp plans are changed. Many of the marketing and advertising commitments we have, you have to -- you just can't unwind those overnight. Those run out. So we've not made any longer commitments. We're utilizing the internet a lot more from the standpoint of used cars, so I would say that the cost reductions have taken place, and I was able -- just on a quick basis -- kind of look at December to January, look at January to January and there's no question when you add up the different components, we're getting that cost reduction.

Thank you. Question also on the F&I business. I do fairly big decline in F&I per unit. Wondering if you could speak to that.

What you've got to imagine is that today that today on F&I that the amount financed has gone down, number one, for our perspective, the sale price of vehicles both new and used is down and the ability for us to over allow and then just additional 1,000 or 2,000 or 3,000 across the network is a substantial amount. There were lots of what I call flats that were paid by the OEM finance companies which give us less revenue on the finance line in our reserves and I think that when they look at the credit profile of the customers, the stipulations are certainly tougher. So the rates that we're able to charge are somewhat impacted. Then we had a huge FX impact in the UK from the standpoint of probably $75 a unit, if you looked at overall.

And the declines in new and used cars, same store, how much of that would you attribute to reduced traffic and how much of it is lack of availability of finance?

Well, let me say this, that traffic is down. I don't talk to a car guy that I know here in the here US and even internationally and say traffic is down. I would say closing ratios are tougher too. People can't get financed in some cases, so there's no question that we have to deal with that. But to me overall, this past weekend here in the US alone, President weekend was pretty decent for us. In all brands around the US, I don't have a clear picture of the UK, but there's less traffic. Credit requirements are tougher. I think people are out there buying, are really maybe with consumer confidence being where it is today, they're being much more cautious. So do we really need to buy a car today? And then with this overhang of the domestics and what's going to happen and I might be waiting if I was a buyer to find out are there going to be any more incentives, any more government initiatives that would drive business, I might want to take advantage of that.

Very good. Thank you and good luck.

Yes, thanks, Rick.

Thank you. Our next question in queue, that will come from the line of John Murphy with Merrill Lynch, and your line is open.

Good afternoon, Roger.

Hi, John.

Just one question on the cost savings as we step forward, and the macro is very difficult to call right now, but it does seem like things are getting tougher. $100 million is a big number, but is there anything more in there that you -- any more levers that you can pull, either harder or different levers? It looks like the advertising you were talking about $20 million to $30 million, there might be more room there. Would that be something that you'd be focused on, or what would the other items possibly be?

I think we have to be careful. We have to be visible in these markets, and there is some pushback from our GMs and some of our AVPs on how deep do we want to cut this. But obviously, it's a lever that we can push harder and take more costs out, and we'll do that. Also, we'll look -- as we look at the number of salespeople that we have in these dealerships, as we go forward, we're going to look at what's the volume and we know what an average salesperson should sell , so we can -- there's probably -- if the market stays at this level, there will be more human capital that can come out and we would expect to do that on an ongoing basis. The other thing we're going to have is we're going to have a lower inventory, there's going to be no question. Now interest rates are down and we're getting the benefit of some of the lower LIBOR rates, but we would continue to take inventory out ,and I think the key thing we have to do is manage our fixed growth. I don't want to reduce the number of people on our service drives. We need to upsell there which is very important to us as we go forward. So to me, at the end of the day, we've got to look at area structural costs across our business. As we do some consolidation, those are all things that we can look at as we go

And you just sort of led me into my second question on parts and service. We saw a little bit of deleveraging there because of the weakness in revenue. Is there something you could specifically do to ramp up revenue significantly, or I mean, what can you do in parts and service? You made a big investment in that business. I'm just wondering if there are additional actions you could take, or is this just a question of the cycle and wait until the consumers start spending again on customer pay.

I think if you look at the size of our parts and service business an you take the FX out, we really demonstrated how strong and how important that is in the retail business model. Because at the end of the day, what really had to take place was you have your internal, which is obviously the predelivery inspection and some of the reconditioning. Today, we're probably doing less reconditioning on used cars because we don't want to get the cost of sale too high. So that's an area that may be impacted slightly in our fixed side. But I feel good about that. And what we need to do is look at vehicle inspections, that lead upsell, and there's no question that as we go forward, we're going to do a lot of internet impact selling with the consumer on the service side. And one thing that I think is key, which we continue to forget, is many of these premium luxury players have sold a full service package and have extended warranties, and I can tell you, it's very hard not to take your new BMW, new Mercedes not into the dealership not to get worked on, either under warranty or what I would call under a consumable maintenance inspection, so I see those operating in line where we are today. And by the way, our margin really held quite well when you look at overall the impact what we've seen. You're going to see a lot of these small mom and pop shops close up and the dealerships are going to get the benefit of that too, where you might have gone with your Porsche to the local guy, you're going to come back to the dealership.

Once again, you led me into my last question. Just real quick. There seems to be a slightly more favorable view from the automakers towards the larger public groups, and there's been some loosening of framework agreements and the like and some restrictions there. Do you feel like there's a shift here that you guys are becoming even greater partners than previously because of the stress we're seeing in the market and that might be an opportunity?

Well, I think the fact that we have access to the capital markets and we have the benefit, the credit lines that we've established, the subordinated debt markets, that if this market changes, we have got I think all of the -- our peers have got excellent relationships with the OEMs. Sure, we have -- time to time we don't agree with them on certain things, but the majority of times we do. I would say they would look to us in troubled situations, we had a situation in the UK where BW Audi came to us and we had the opportunity to make purchase in the northern part of the UK, and I think that's going to continue to happen. And I certainly will say to you that opportunistically within our guidelines, we're going to continue to partner with all manufacturers and if there's a consolidation of the domestic market here over the next three to six months, there might be some very attractive deals available to us here. So our door is wide open with all of the manufacturers, and I think it's the same with us.

Great. Thank you.

Thank you. Our next in queue, that will come from the line of Scott Stember with Sidoti & Company. Your line is open.

Scott, how are you?

Good, and yourself?

Good.

Can you talk about what the impact of foreign exchange was in the quarter and for the year?

Well, it was $180 million in revenues for the quarter, and I don't have -- Bob, do you have it? I don't have it for the year. Why don't you get a hold of Bob after the call and we'll give that to you, but it was $180 million in revenue for Q4.

And you don't have the earnings portion?

It was neutral to fourth quarter earnings, little bit beneficial.

Okay. And just talk a little bit more about the used car situation here in the US. Are you actually seeing as we speak right now customer traffic picking up on that side as well, or are we just talking about pricing helping?

I think we're seeing -- I think the used car business is better. People just are saying, look, I'm not going to spend the money and there's such a delta today between a new and used car, and many of the finance rates on some of these year old or 14, 15 month old new cars are very attractive. The issue today is that everybody's selling used cars, so it's putting pressure on the ability to get some of these vehicles. So we're in a situation where we're out trying to buy at the auctions, and I think that the CPO programs that have been promoted by the OEMs were seeing incentives even from those to move CPOs, so that's only positive. And they have a number -- remember, one other thing that I maybe forgot to mention earlier, just came to mind, is that that there's a tremendous amount of lease vehicles coming off the premium luxury portfolios, and the benefit we have as dealers with those OEMs, we get first choice of those, and that's going to help us drive some of this used car potential volume as we go forward, because the first thing the OEM wants to do, let's get this back to a selling dealer, or to a dealer that's in the same OEM team and then move these vehicles into the market. What that does, is it raises residuals, it helps, as I mentioned earlier, the OEM, if they were going to take a loss, it helps them from a loss perspective. There's a lots of effort going forward on trying to sell off lease cars to the consumer that's driving it, and that ends up being a benefit with a margin that comes back to the selling dealership. So there's lots of levers taking place now in used.

And as far as parts and service, do you have the customer pay for the US if you wanted to strip out the foreign exchange component?

I don't have that in front of me right now.

Essentially flat.

Tony says it's essentially flat.

Okay. That's all I have. Thank you.

All right, thanks, Scott.

Thank you. The next question in queue that will come from the line of Rex Henderson with Raymond James, and your line is open.

Good afternoon, and thanks for taking my question. A couple of quick questions regarding the charges first. Can you tell me, were those intangible write-downs, were those on US dealers? UK dealers? Or both? And kind of the balance between the two.

Well, there was no impairment. There was some slight franchise impairment in the UK, but a very small amount. The majority of the charges were in the US market.

So given that, should we be worried about potential for a write-down on the UK dealerships going forward?

That's a good question. As you know, we had a triggering event in the fourth quarter with the credit markets deteriorating the way they did, and when you do that, you've got to look at cash flows. You then have to look at forward comparisons or looking at what the market's going to do in '09, '10, '11, '12 and 13. And then you have, certainly, the weighted cost of capital has to come into it. With all these calculations, we looked in the US, made the impairments and we did the same tests, we have KP and G and Deloitte & Touche are our auditors, they reviewed the numbers that our people put together and at this point, we don't see that there's any impairment for the UK and did not take impairment during the fourth quarter.

Okay. The other thing was a few minutes ago I heard you say that the -- or somebody there say that the currency impact on revenues was $180 million, but currency was a slight positive to earnings. Does that mean that the UK reported a slight loss? Is that what I conclude from that?

Yes, the UK had a loss for the quarter. Yes, it did. One other thing, Rex. The reason that we don't have the higher write-down or a write-down in the UK is that the multiples that we paid for businesses over the last six or seven years was lower. Remember, we've talked about that on the calls before, than it was in the US.

Okay. That's helpful.

There's always -- look, you always have a risk, though, of impairment as you go forward, but if there would -- if we would have been on the edge, I'm sure the auditors would have recommended that we would take an impairment. But the stock price is always also a governor that it comes into play as we go forward.

Okay. And finally, want to talk a little bit about the inventory levels. You said you were down, I think $240 million since the end of the third quarter, but your days sales were at 99 on the new side. How much further do you think you have to come down on inventory to get comfortable that your inventories are appropriate for the current sales pace?

We've got to get them down. We've got to get the new down to 75 and I think the 60 -- or 39 to 40 days on used is probably pretty realistic when you look at it on a 30 day turn. I haven't done a calculation based on -- I just did a mid-month reduction in inventory, but I think we need to be down in the 65 to 75 days on new.

And can you get there by the end of the first quarter, or will it take longer than that?

I would tell you this. We have charged our guys with days supply reductions, I wish I could tell you that that was going to be the answer, but I guess we'll have to wait until the end of the quarter. But we're looking at sales rate -- the sales rate drives that tremendously. The good news is that 2008 inventory is down to just a few number of units, so we're not sitting with a lot of stagnant inventory. And to me, it's interesting, when you talk about inventory, five or six months ago, you couldn't get Priuses, so you go out and you order a bunch of Priuses. You turn around now, you have them in inventory and they're putting $1,000 of bonus on them to try to sell them. So this market has changed so fast, it's very difficult to hope. But I can assure you that we're going to be better when we get to March than we were in December. That thing what I will say for sure, both domestically and internationally.

One final comment, I wanted to thank you for putting the covenants in the -- the covenants for both the US and the UK in there. Helpful and provides a lot of clarity and confidence.

Well, we were asked by you and a number of other of your peers to do that. I think it's good we tried to explain what all these numbers were with and without the charge. It's a difficult time for all of us, and we obviously hope that this cloud over our business starts to move on here shortly.

Okay. Thank you very much.

Yes.

Thank you. The next question in queue, that will come from the line of Carl Dorf with Dorf Asset Management, and your line is open.

Hi, Roger. I want to say on the last question, that's what I was curious about, can you give any more clarity on the write-offs, the intangibles? Which dealerships and why was it a function of the level of profitability in the different dealerships? Was it any particular brands in particular that was hit the most and of the intangibles that are still left, how much of them would you say, could you break it out as to how much this the UK?

Well, as I say, we took no impairment other than a small amount of franchise from the standpoint of the international or the UK. And we have tested the US based on 142 from a cash flow, and we don't do it by brand. We do it by section here in the US. We have east, central and west. So that covers all of the brands in those particular markets. And the UK is operated as a separate segment itself. But to me, the intangibles that we have written off have been significant, and we don't expect that to hit us further in the US unless there's a further deterioration of the marketplace and in the stock price.

Of the 974 that's left, how much of that would be UK, approximately?

Probably, in franchise value in the UK, would be about 50 million.

So that's still mostly US intangibles?

That's correct. You have goodwill. You have goodwill at the end of the year in the UK of about $300 million. 150 -- probably, yes, $300 million US, not pounds.

What would the impact, the goodwill potentially in the UK, if anything?

Carl, it would be cash flow. It would be the market deteriorating further. But we had plenty of room. Let me say this, there was a lots of discussion between the accounting people who we deal with and looking at the tests, and there's no question. As you know, the discount rate, the weighted average of cost of capital moved probably 3 to 350 basis points at the end of the third quarter to the fourth quarter, and this had the impact, probably the biggest impact on us as we had to make our adjustments here.

Thank you for the additional clarification, Roger.

Call us, Carl, if you want further. You can call Bob O'Shaughnessy. I need to go to school on this. Sorry.

Thank you.

Thank you. At this time we have no additional questions. Please continue.

All right. I think that's it for the day. Tony, thank you very much and hopefully we have a better report next quarter. Thank you very much.

Thank you, and ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.